Why This Billionaire Added to His Stake in Fannie Mae and Freddie Mac

Multiple billionaire investors have put both their wallets and their words behind Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) and this week one announced he was upping his ownership to more than 11% of each.

Source: Insider Monkey.

The investment boost
Bill Ackman of Pershing Square Capital Management had two separate SEC filings placed this week which announced he has boosted his position in Fannie Mae and Freddie Mac by 13%, now owning 11.3% and 11.1%, respectively, of the publicly traded stock for the government sponsored entities. 

Curiously, Ackman did not do this through the actual purchase of common stock, but instead entered into a total return swap agreement with UBS. In short, this is an agreement where UBS bought the additional stake in Fannie and Freddie on behalf of Ackman and Pershing Square. Pershing Square then pays UBS interest for the total cost of the stock purchase.

UBS will then pay Pershing Square for any positive performance in the shares of Fannie and Freddie, and conversely, Ackman would have to pay UBS for the negative performance.

The agreement is essentially a loan where Pershing will receive the possible rewards and risks of owning the common stock of Fannie and Freddie, except it doesn't have to tie up its own capital to do so.

The question
Much has been made of the remarkable plummet seen less than a month ago by Fannie and Freddie following the announcement of the Senate Banking Committee's bi-partisan bill aimed to wind down the two government sponsored entities. In addition just last week, Maxine Waters of California, the ranking Democrat on the House Financial Services Committee put forth her own bill which would endeavor to create a co-op issuing the government-guaranteed housing loans.

Source: Flickr / Future Atlas.

Uniquely, the proposal by Waters seeks to create a system in which mortgage lending is structured more similar to a public utility. The Johnson-Crapo proposal, on the other hand, also seeks private capital, but instead hopes to mimic the Federal Deposit Insurance Corporation -- which backs all bank deposits through fees --  through the creation of the Federal Mortgage Insurance Corporation. Waters calls for a 5% backing by private enterprises, while Johnson and Crapo seek a 10%.

"Fannie Mae and Freddie Mac's return to profitability and repayment of taxpayer dollars has led some to rightly speculate whether (they) need any reform at all," noted Waters in a statement of her bill. "I am hopeful that this legislation will continue to move the conversation on housing finance reform forward."

These bills, plus the Corker-Warner bill and others, have led many to question what the future of Fannie and Freddie will ultimately entail.

The unsaid answer
Much has been made of the recent string of legislation -- some bi-partisan and others distinctly partisan -- introduced by politicians surrounding the ultimate future of Fannie and Freddie, but the ultimate answer could be years away. In fact it may not even be in the hands of politicians, as Reuters notes, the Johnson-Crapo proposal, "would leave a decision on how to treat their private shareholders to the courts." 

Is this where Fannie and Freddie end?
Source: Flickr / Ryan Wick.

In adding to his common share stake -- remember this is different to the preferred shares held by other noted investors like Bruce Berkowitz -- Ackman in essence affirmed what he noted in February when he said he "is convinced shareholders will win their lawsuits against the U.S. government."

As with any traded stock, there must be both a buyer and seller, so we may find out someone took the opposite stance and decided to unload their entire position when the stocks plummeted by more than 30% a few weeks ago. However, investors now know that while Ackman may not have used words, his actions clearly display he still believes in the potential of Fannie and Freddie.

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  • Report this Comment On April 05, 2014, at 8:11 AM, bigjohn327 wrote:

    any bills that do anything to f n f are subject to the courts overseeing and legality. crapo has no choice as to how the shareholders are treated. It does not matter what bill gets passed and that is why none will get passed as they will in all probability wait for the courts to decide what f n f will look like after the court actions are complete

  • Report this Comment On April 05, 2014, at 2:43 PM, pawncracker wrote:

    @ bigjohn

    Smart money knows that ultimately FNMA and FMCC fate depends on court decision. I simply don't see how the "sweep amendment" by the government in 2012 is legal in any way. Secondly, owning 79.9% of the commons does not five the government the right to confiscate profits for the remaining shareholders.

    Wiping out shareholders would be disastrous. According to Richard Bove, $70 billion of Americans wealth would be wiped out instantaneously. I just don't see how it is feasible to dismantle these fundamental institutions without serious putting housing sector of economy (which is 20% of economy) in jeopardy. When politicians speak of "winding down", it means reducing size of FNMA and FMCC market share. This is possible, but it must be in measured increments and not wiping out shareholders and opportunities for Americans to buy houses and build equity over a lifetime.

  • Report this Comment On April 06, 2014, at 9:01 PM, infinitemf wrote:

    After all these short sighted speculative proposals, FnF will emerge much stronger and FnF shareholders will be winners.

    Only possibility is FnF may be broken up in to

    as many company as required to prevent TBTF.

    But this will in fact, affect shareholders very positively.

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